A joint venture is when you undertake a project with a commercial aim in partnership with another person/s.
Joint ventures are pretty common when it comes to property investment, whether that be a property development or acquiring a property to let as an investment.
There are several good reasons why joint ventures work, typically the spread of skills and experience across partners make the whole much greater than a sum of their parts.
For smaller developments and investments it makes sense to keep joint ventures as simple and vanilla as possible (for large developments the reverse often applies). Typically the joint venture works because:
- It brings a new skillset or experience to the project
- It brings access to funding or capital to make the project happen
- The partners have a similar outlook and aim and want to spread the risk
That said, there are a few things to do before jumping into a joint venture. Here are some tips.
- Get to really know your partner. The most trusted and longstanding family member or friend can turn out to be very different as a business partner. Get under the skin of each other, what makes you tick, your ethics and real objectives. Leave no stone unturned
- Whatever may go wrong, discuss it at the outset. Make a long list of everything that could go wrong such as running out of money or going over budget, going over timescales, mistakes, errors, everything
- Clearly outline and define your separate roles and responsibilities. Think about having a job description for everyone, make it clear who is responsible for what and stick to those parameters
- Profits. Let’s look on the plus side. How are the profits going to be split? Is it 50/50, will it be all in cash? What about the next project? What about salaries? What is the minimum you will accept should the property price need to be adjusted?
- Timescales. What is going to happen when? Set clear timescales for what needs to happen by what date. Ask how long the project will take, do you agree with those timescales, are you all in agreement. What happens if it takes longer or overruns?
- Have a formal and binding agreement drawn up by a solicitor. Never go with a handshake or informal agreement no matter how much you trust someone. Having a formal agreement should include arbitration and how disputes are resolved. This will avoid costly arguments (because they do happen, even between the best of friends) and will also focus the minds of everyone, after all this is a commercial arrangement, don’t forget that.
Financing Joint Ventures
For many lenders, joint ventures are good news and can make financing a joint venture easier than in a sole name. They add a combination of skills and abilities as well as more routes to recovery should the project overrun or go awry. Always take legal advice from an independent solicitor when it comes to funding, you will all be responsible but different parties will have more or less at stake than the other.
Commonly a new limited company is used for joint ventures, a ‘special purpose vehicle’ or SPV. A company set up specifically for the purpose of holding the project.
If you are looking at property development or investment with a partner then take advice, use the tips and if you want to finance the project then let me know.
By Dave Farmer